Critical illness not fit to replace income protection

Jamin Robertson says employers looking to critical illness as an alternative to income protection will find shortcomings

If you read nothing else, read this …

Spiralling costs have led many employers to withdraw income protection. The search for cheaper healthcare could prompt organisations to look at critical illness cover.

Critical illness, however, is not viewed as a realistic alternative because it is seen as less effective in encouraging a return to work.

Article in full

Critical illness insurance has never found widespread favour among bosses. However, with many firms withdrawing income protection due to spiralling costs, could this open new doors for critical illness cover? As growth in the income protection market has slowed, the search for cheaper healthcare could bring critical illness insurance out of the shadows.

But those in the insurance industry say there are few real alternatives. The future growth of critical illness insurance is expected to hinge more on its continued popularity as an optional benefit, with employers seeing few incentives to include it among core healthcare provisions.

According to Employee Benefits/Towers Perrin Flexible Benefits Research 2005, almost 70% of organisations offer critical illness insurance through flexible benefits, whereby employees foot the bill for any increased premiums. While employees value critical illness insurance for the lump sum benefits paid upon diagnosis of serious illness or disability, among employers it appears unlikely to extend beyond inclusion in flex, because big cash benefits are unlikely to promote a return to work.

Paul White, senior consultant at Mercer HR Consulting, says: "For many people, if they had a heart attack and were given £100,000 probably the first thing they would do is hand in their notice." That might not be all bad, because critical illness may be viewed as a tidy way to remove sick staff from the payroll, provided the employer has no further obligations under the terms of the Disability Discrimination Act.

Nicola Smith, communications manager for Bupa Group Risk, believes critical illness cover would be more attractive if benefits were shared between employers and workers, to fund workplace adjustments and employee advice. But for organisations looking to retain staff able to return to work, critical illness currently comes up short.

Simon Bailey, head of marketing, employee benefits at provider Scottish Equitable, says: "A good income protection policy offers rehabilitation [services], so it helps a person get back to work. It’s helpful to employers." So while critical illness cover is cheaper than income protection, the lower price reflects leaner criteria, centred around life-saving surgery, stroke and significant disability.

White believes those crucial differences mean critical illness insurance is not a realistic alternative. "Of all the reasons people are sick, the biggest two are psychological and musculoskeletal, and if you say that accounts for 50% of long-term illnesses then [critical illness cover] by and large doesn’t pay out for those conditions." Critical illness’ strong presence in the individual market, where it is commonly offered as an add-on to financial products such as mortgage payment protection, may also have impacted on its group performance. As take-up spreads employers may see little need to introduce the benefit.

And figures from the Association of British Insurers show group income protection will lead the way for some time yet. Critical illness cover had £10m worth of new group business in 2004, while group income protection increased by £142m. Colin Micklewright, income protection business development manager for Canada Life, therefore, believes critical illness insurance is best placed as a complement to income protection.

Bupa’s Smith agrees: "Critical illness is not a poor man’s income protection and it shouldn’t be promoted as such. It is appropriate for illness of a finite period, it’s not good for long-term disability."